11 advantages of a good cost accounting system

Important advantages of a Cost Accounting System may be listed as below :

1. A good Cost Accounting System helps in identifying unprofitable activities, losses or inefficiencies in any form.

2. The application of cost reduction techniques, operations research techniques and value analysis technique, helps in achieving the objective of economy in concern’s operations. Continuous efforts are being made by the business organization for finding new and improved methods for reducing costs.

3. Cost Accounting is useful for identifying the exact causes for decrease or increase in the, profit/loss of the business. It also helps in identifying unprofitable products or product lines so that these may be eliminated or alternative measures may be taken.

4. It provides information and data to the management to serve as guides in making decisions involving financial considerations. Guidance may also be given by the Cost Accountant on a host of problems such as, whether to purchase or manufacture a given component, whether to accept orders below cost, which machine to purchase when a number of choices are available.

5. Cost Accounting is quite useful for price fixation. It serves as a guide to test the adequacy of selling prices. The price determined may be useful for preparing estimates or filling tenders.

6. The use of cost accounting technique viz., variance analysis, points out the deviations from the pre-determined level and thus demands suitable action to eliminate such deviations in future.

7. Cost comparison helps in cost control. Such a comparison may be made from period to period by using the figures in respect of the same unit of firms or of several units in an industry by employing uniform costing and inter-firm comparison methods. Comparison may be made in respect of costs of jobs, processes or cost centres.

8. A system of costing provides figures for the use of Government, Wage Tribunals and other bodies for dealing with a variety of problems. Some such problems include price fixation, price control, tariff protection, wage level fixation, etc.

9. The cost of idle capacity can be easily worked out, when a concern is not working to full capacity.

10. The use of Marginal Costing technique, may help the executives in taking short term decisions. This technique of costing is highly useful during the period of trade depression, as the orders may have to be accepted during this period at a price less than the total cost.

11. The marginal cost has linear relationship with production volume and hence in formulating and solving “Linear Programming Problems”, marginal cost is useful.